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Qualitative Research in Accounting & Management

Emerald Article: The use of performance measures: case studies from the microfinance sector in Kenya Nelson Waweru, Gary Spraakman

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To cite this document: Nelson Waweru, Gary Spraakman, (2012),"The use of performance measures: case studies from the microfinance sector in Kenya", Qualitative Research in Accounting & Management, Vol. 9 Iss: 1 pp. 44 - 65 Permanent link to this document: http://dx.doi.org/10.1108/11766091211216105 Downloaded on: 15-01-2013 References: This document contains references to 52 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 469 times since 2012. *

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Nelson Waweru, Gary Spraakman, (2012),"The use of performance measures: case studies from the microfinance sector in Kenya", Qualitative Research in Accounting & Management, Vol. 9 Iss: 1 pp. 44 - 65 http://dx.doi.org/10.1108/11766091211216105 Nelson Waweru, Gary Spraakman, (2012),"The use of performance measures: case studies from the microfinance sector in Kenya", Qualitative Research in Accounting & Management, Vol. 9 Iss: 1 pp. 44 - 65 http://dx.doi.org/10.1108/11766091211216105 Nelson Waweru, Gary Spraakman, (2012),"The use of performance measures: case studies from the microfinance sector in Kenya", Qualitative Research in Accounting & Management, Vol. 9 Iss: 1 pp. 44 - 65 http://dx.doi.org/10.1108/11766091211216105

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The use of performance measures: case studies from the micronance sector in Kenya
Nelson Waweru and Gary Spraakman
School of Administrative Studies, York University, Toronto, Canada
Abstract
Purpose The intent of micronance institutes (MFIs) in developing countries is to provide loans to very poor people in order to help them transform their lives. MFIs tend to receive subsidies; sustainability is being sought to free MFIs from non-market dependencies. Sustainability is expected to be achieved with best practices, of which management with performance measures is a component. The purpose of this paper is to examine the use of performance measures by three Kenyan MFIs, which are classied as formal and client based, and likely to use rational and explicit performance measures. Clients in these MFIs are placed into self-help groups with two responsibilities: to provide mutual support and advice to the borrowing client; and to provide the MFI with a guarantee that loans of group members will be repaid. Design/methodology/approach Based on a review of the economics and performance measurement systems literatures, research questions were developed along with an interview guide. Case studies were used to administer an interview guide which was distributed to the respondents prior to the face-to-face interviews. Findings The study concludes that MFIs have relatively well-developed performance measures that support their particular businesses. There was a good balance between the use of nancial and non-nancial performance measures. However, output measures were more commonly used than process measures. The nature of the MFIs suggests the importance of performance measurement. The managers of the MFIs are concerned with performance measurement, as expected within a bureaucracy, and a top-down demand is present. In addition, group members or clients are interested in performance measurement as each member guarantees the loans of all fellow group members who have loans with the MFI. Thus, the customers exert a bottom-up demand for performance measurement. Originality/value The ndings support the view that performance measures are a means for managing MFIs and are a likely requirement for sustainability. Furthermore, the ndings have identied performance measures (similar to those at banks) that are appropriate for the three MFIs in Kenya. The ndings are important since the identied performance measures may be adopted by other evolving MFIs in this relatively new sector. In addition, the ndings contribute to a better understanding of the genesis of the less popular results and determinants performance measurement framework of Fitzgerald et al. Keywords Kenya, Financial institutions, Performance measures, Micronance institutions, Non nancial measures, Services sector Paper type Research paper

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Qualitative Research in Accounting & Management Vol. 9 No. 1, 2012 pp. 44-65 q Emerald Group Publishing Limited 1176-6093 DOI 10.1108/11766091211216105

1. Introduction and motivation In its short history, micronance has had a major impact on the lending to the poor of the world. It received a signicant start in 1976 when a Bangladeshi professor, Muhammed Yunus, used his own money to make a $27 loan to 42 village women (Courts, 2008, p. 58). Unlike banks, which demanded collateral, he worked on the premise that although the poor did not have collateral, they were productive, hardworking, and able to repay loans

if made at competitive but fair rates. In order to get a loan, Yunus required borrowers to be part of a solidarity group consisting of at least four others borrowers. This was done because of the belief that groups lead to discipline, e.g. people who are known to be lazy or irresponsible are unable to nd people to join their group until they change their behavior (Courts, 2008, p. 3). Once in groups, borrowers monitored and regulated one another. In effect, group lending made the group members co-signers, thus reducing the chance of default. To pursue his idea of micronance, Yunus established the Grameen Bank, which has expanded to 37 different countries and has made more than $8.7 billion in loans since 1976 (Bruton et al., 2011, p. 3). Micronance has expanded beyond Grameen Bank to 154.8 million micronance clients served by 3,350 micronance institutions (MFIs) in many parts of the world, including inner-city Los Angeles, Bosnia, Peru, Bolivia, Kenya and others (Ahlin et al., 2011, p. 105). For his nancial and humanitarian efforts, Yunus was awarded the 2006 Nobel Prize for Peace[1]. There has been a shift in the modus operandi of MFIs. Hamada (2010, pp. 2-8) argues that there has been a paradigm shift in MFIs from a social movement to the integration of micronance into the banking sector. In the second half of the 1980s, the rst occurred as MFIs focused on product-centered lending. There was generally a single, standard product. The second paradigm occurred in the middle of the rst decade of the 2000s with a shift to client-centered lending. With the latter there was a greater variety of products, and a denite commercialization of MFIs in an attempt at sustainability. To understand the impact of commercialization on sustainability, this paper was motivated to examine three Kenyan MFIs using a case study methodology to detect their use of performance measures (PMs) for managing micronance loans. The working hypothesis was that the use of PMs can assist MFIs to manage the efciency and effectiveness of their operations, and thereby lead them to nancial sustainability. It was found, briey, that these MFIs used PMs for understanding their operations and that the PMs were comprehensive and well thought out. Moreover, all three Kenyan MFIs had sets of PMs that were similar in many ways. Frequently a goal of MFIs, such as the three that were studied in Kenya, is to achieve nancial sustainability, which is dened as the ability to cover all expenses with revenue plus produce a surplus of revenue over expenses to nance future growth (Ayayi and Sene, 2010, p. 304; Prior and Argandona, 2009, p. 353). As an elusive economic condition, sustainability has not been achieved by most MFIs, and consequently subsidies are still needed. For example, poverty-focused lenders such as the Grameen Bank would not be able to survive without subsidies (Morduch, 1999, p. 1571). In this regard, Armendariz and Morduch (2010, p. 18) say:
[. . .] the hope [. . .] is that micronance programs will use the subsidies in their early start-up phases only, and, as scale economies and experience drive costs down, programs will eventually be able to operate without subsidies.

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Morduch (2000, pp. 617-18) argues that only MFIs that pursue best practices or principles of good banking can both alleviate poverty and attain sustainability. Those best practices are still unclear, and consequently efforts are needed to ascertain how MFIs can provide loans to the poor while achieving nancial

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sustainability (Morduch, 2000, p. 627). To understand what constitutes best practices for MFIs it is rst necessary to understand the economic underpinnings of MFIs. Crucial MFI economic attributes are derived from group solidarity. Lending to an individual where a group guarantees repayment creates joint liability. The group members tend to be neighbours and friends who are in good positions to observe the behavior of the borrower and thereby reduce information asymmetries. Stiglitz (1990, p. 353) described this group lending as peer monitoring which is an incentive-monitoring system in the presence of costly information. The group members are also responsible for the loan if the borrower defaults, which is further incentive for the group to monitor the borrower (Ahlin and Townsend, 2007, p. F43). In effect, a joint liability contract reduces moral hazard and adverse selection by using the local group to provide information (to reduce information asymmetries) and force the borrower to adhere to scheduled repayments (Cull et al., 2007, pp. F108-9; Kono and Takahashi, 2010, p. 59). Peer monitoring works at the group level. Members of the group monitor one another, etc. and the MFI benets from this monitoring in terms of improved repayment rates (and decreased default rates). Nevertheless, the MFI is not privy to the information available to the members in a group. The dire consequences of information asymmetry are reduced, but not solved for the MFI, creating the need for a performance measurement system. Group solidarity has two attributes that affect the repayment rate: (1) selection of group members; and (2) monitoring of group members. Best practices will be revealed by understanding which MFI practices for these attributes lead to increased repayment rates. The literature provides some evidence on best practices. We will rst consider the selection of group members. There is empirical evidence that composition of the group affects loan repayment rates. With experiments using micronance recipients in Nyanga, South Africa and Berd, Armenia, Cassar et al. (2007, p. F86) found that personal trust between individuals and social homogeneity within groups has a positive effect on borrowing group performance. However, they found that mere acquaintanceship or trust in society has no signicant effect on group performance. Hermes and Lensink (2007) say the ndings of Cassar et al. (2007) stress the necessity to disentangle different aspects of the group solidarity when explaining repayment rates. The association among group members needs to be carefully considered. Sharma and Zeller (1997) concluded that the tendency to reduce screening, monitoring, and enforcement among relatives reduces the loan repayment rate. The research of Zeller (1998) found that groups with stronger social ties have higher repayment rates and that repayment declines as the number of relatives in the group increased. Wydick (1999) found that the distance between group members is negatively correlated to the repayment of loans. Another nding was that credit rationing of borrowers increases repayment, which Sharma and Zeller (1997) interpreted as an incentive to screen, monitor, and enforce. They also found that self-selection at the screening stage is correlated with improved repayment behavior. Zeller (1998) detected that more remote groups with minimal credit alternatives were more likely to have better repayment records.

The empirical evidence suggests that repayment rates improve when groups consist of unbiased friends and neighbours who have strong social ties but are unrelated in kinship. Acquaintanceship or trust in society has no signicance. These characteristics have more impact when there is a shortage of credit, because the relationship is more important to all group members. There is also empirical evidence that monitoring affects loan repayment rates. Wenner (1995) and Zeller (1998) found that repayment improves if groups have written/formal rules specifying the expected behavior of members. Although the formal and explicit specication of expectations is not monitoring per se, it does clarify what is being monitored and thus enhances monitoring. Wydick (1999) found that the communication of weekly sales of members is positively correlated to repayments. Relatedly, Karlan (2007, pp. F78-9) in a data intensive study of FINCO-Peru found evidence that monitoring improves repayment rates. Social connection, which assists with monitoring, is dened as knowledge and awareness of each others default status and causes, as well as direct evidence of penalties and relationship deterioration. An article entitled, What drives micronance institutions nancial sustainability by Ayayi and Sene (2010, pp. 304-8) provides insights into what needs to be monitored for sustainability: . Interest rates need to be high to cover costs, but needlessly high rates would drive away clients. . Classication of loan repayment arrears allows managers to make fully enlightened decisions. . Use of information technology facilitates the control of operating and personnel costs. . Efcient banking practices need to be adopted, including a corporate structure, marketing department, internal control system, and audit and risk committees. Ayayi and Sene (2010, pp. 308, 321) conducted their own research on 223 MFIs with audited nancial statements and other veried information. They found that credit risk management was the determining factor for nancial sustainability. Interest rates had to be sufciently high to cover costs. Expense control was essential. Overall, they found that the use of crucial information with good banking practices and information systems were indispensible to sustainability. The literature has suggested that nancial sustainability can be facilitated with best monitoring practices and systems, i.e. explicit, formal information on crucial attributes such as interest rates and spreads, arrears, etc. In management accounting terms, information that managers use to effectively monitor an MFI would be called PMs. The motivation for this paper comes from the possibility of PMs leading MFIs to nancial sustainability. A performance measurement system would comprise all PMs used to manage MFI operations. As performance measurement systems (PMSs) are integral for management, they are also crucial for the reduction of risk (Mikes, 2009, p. 21). Specically, we seek to answer two research questions: RQ1. What PMs are being used by MFIs in Kenya? RQ2. How and why do MFIs in Kenya measure their performance?

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The paper will be organized as follows. Section 2 contains the literature review of PMs related to MFIs and service businesses. Section 3 describes the research sites, MFIs in Kenya. Building on the literature review and the research site, Section 4 describes the methodology for examining the PMs used by Kenyan MFIs. Section 5 summarizes the information gathered on the use of PMs at the three MFIs. The discussion and conclusion are in Sections 6 and 7, respectively. 2. Literature review and conceptual framework The main purpose of this paper is to understand the PMs used in the micronance sector. PMs and PMSs have an established literature, but not in the context of MFIs. However, the PMS literature can suggest the attributes appropriate for MFIs. Let us start with Otley (1991) and Merchant (1987) who say the main purpose of performance measurement for organizations is to construct a set of measures, which if achieved, will result in the organization achieving its desired objectives. PMSs focus attention and communicate the ambitions and priorities of the organization to its managers and employees (Neely and Adams, 2001). More importantly, PMs in setting out what is important promote goal congruence within the organization, motivate employees, and provide direction and information for decision making and control purposes (Moon and Fitzgerald, 1996). One of the best known PMSs is based on Kaplan and Nortons (1992, 1996) balanced scorecard (BSC). The BSCs purpose is to supplement the traditional nancial measures with additional perspectives to measure and to promote the desired behaviors within the rm. The BSCs limited PMs provide an overview of organizational performance generally along four key generic dimensions (nancial, customer, internal processes, and organizational learning). The dimensions are expected to capture and measure activities that are critical to the efcient and effective functioning of the organization. In other words, an organizations mission and strategy are translated by the BSC into a comprehensive set of PMs. The BSC assists in making visible the interrelationships within the organization, denes relationships, and tells employees the contribution they can make to overall organizational performance. There are numerous other systems for classifying PMSs. Garengo et al. (2005, p. 37) identied eight PMSs for small- and medium-sized organizations (these are the organizations that would be comparable to the MFIs studied in Kenya). Garengo et al. (2005) say two of those PMSs are particularly popular with service organization researchers: the BSC of Kaplan and Norton (1992, 1996) and the results and determinants framework (RDF) of Fitzgerald et al. (1991) and Moon and Fitzgerald (1996) (levers of control by Simons (1995) were not included). The other six systems include: performance measurement matrix (Keegan et al., 1989); performance pyramid system (Lynch and Cross, 1991); integrated performance measurement system (Bititci et al., 1997); performance prism (Neely et al., 2002); organizational performance measurement (Chennell et al., 2000); and integrated performance measurement (Laitinen, 1996, 2002). The BSC and the RDF were compared by Garengo et al. (2005). The most popular PMS is the BSC with its four perspectives. The RDF is much less popular. Each was equally successful with 13 criteria, except that the RDF was deemed to have dynamic adaptability, while the BSC was not. The dynamic adaptability criterion is important to MFIs, i.e. external and internal monitoring systems exist along with a review system and an internal deployment system to determine objectives and priorities (Garengo et al., 2005, p. 33).

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Consequently, the RDF was deemed to be more functional for the small- and medium-sized lending units that comprise Kenyan micronance. Nevertheless, both the BSC and the RDF are suitable for service (i.e. MFIs) businesses (Garengo et al., 2005, p. 38; Modell, 1996, p. 64). The BSC limits the assessment to the four perspectives. In general, the RDF is more open to multiple perspectives. A better understanding of the genesis of the less popular RDF is needed. It was developed from in-depth interviews with senior and middle managers from both nancial and operations areas at seven UK service companies. Fitzgerald et al. (1991) recognized that organizations compete on numerous levels in addition to cost and price. Their research suggested a holistic continuum of six dimensions of performance, split into two categories: one that measures results of the companys strategy (nancial performance and competitiveness) and another that measures the determinants of the non-nancial success (quality, exibility, resource utilization, and innovation) (Table I). Fitzgerald et al. (1991) argue that in order to develop this balanced set of measures across all six dimensions, three important factors must be considered: (1) The type of competitive environment in which the organization operates determines the level of interactive information needed for communicating threats and uncertainties. Brignall and Ballantine (1995, pp. 18-23) argue that the design of a PMS should depend on three interacting contingent variables, which together determine the why, the what, and the how of performance measurement. These include the organizations external environment (which explains the why of PMs), its chosen mission (which explains the what of PMs) and its internal capabilities (which explains the how of PMs). The external environment includes variables such as the state of the macro economy, the degree of government regulation and the competitive forces facing the company (Waweru et al., 2004). A highly complex and uncertain external environment may lead to the need for elaborate administrative and co-ordination systems (Brignall and Ballantine, 1995). The internal environment includes factors such as the size and structure of the organization, its culture and history, and the organizations process type.

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Performance dimension Results Financial performance Competitiveness Determinants Resource utilization Quality of service Innovation Flexibility

Type of measure Protability, liquidity, capital structure, market ratios Relative market share and position, sales growth, and measures of customer base Productivity and efciency Reliability, responsiveness, aesthetics/appearance, cleanliness/tidiness, comfort, friendliness, communication, courtesy, competence, access, availability, and security Performance of innovation process, performance of individual innovations Specication exibility, volume exibility, delivery speed exibility

Source: Fitzgerald et al. (1991, p. 8)

Table I. The performance dimension

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(2) The intention of the organization needs to be considered. This determines the relative importance of certain PMs. According to Sureshchandar and Leisten (2005), the appropriateness of a performance measurement framework should be assessed using a list of critical success factors. These include top management support, whether there is ownership in the setting of measures (Otley, 1991), and the perceived achievability of the targets (Baron and Greenberg, 2000). There is also a need to ensure that the measures are clear, unambiguous, and that they are communicated to the subjects being measured. Furthermore, the measures should be based on controllable factors and should be linked to compensation and rewards (Baron and Greenberg, 2000). (3) The service sector in which the organization operates also needs to be considered (Brignall and Ballantine, 1995; Fitzgerald et al., 1991). In differentiating among service organizations, Fitzgerald et al. (1991) identied three services archetypes, namely professional services, service shops and mass shops, using two dimensions, the number of customers processed each day as one dimension and the contact time per customer as the other classicatory mechanism. Professional services are those that have a relatively low number of customers but with high levels of contact time, people focus and process orientation. Mass shops, at the other extreme, have a high volume of customers but with low levels of contact time, people focus and process orientation. Service shops are the intermediate category, processing some hundreds of customers per day and may possess some of the features of the other two categories. The service shop model best represents the Kenyan MFIs. Moon and Fitzgerald (1996, p. 431) say It is almost an axiom management accounting thought that organizations need to formally measure their performance. This would hold for MFIs. For example, PMs play an important role in translating the organizations mission into desired behaviors and results. PMs communicate the rms objectives and goals to employees, monitor their progress and provide feedback on their efforts to senior management. 3. MFIs in Kenya Kenya is a small country located in East Africa with a growing population of 41 million and a density of 72 persons per square kilometer. Kenyan economic activities are largely divided into three sectors: agriculture, industry, and services. Agriculture is the most signicant sector with 75 percent of the entire labour force. This is not too surprising considering that the Kenyan Highlands provide favorable growing conditions for tea, coffee, corn, wheat, sugarcane, fruit, vegetables, dairy products, beef, pork, poultry, and eggs. The industrial sector produces small-scale consumer goods such as plastic, furniture, batteries, textiles, clothing, soap, cigarettes, and our. The service sector includes oil rening, commercial ship repairs, and tourism. Poverty is prevalent. GDP per capita was only $1,600 in 2010, placing Kenya at number 200 in the world ranking of countries from richest to poorest. Relatedly, the unemployment rate in Kenya was an astonishing 40 percent as recently as 2008. This unhealthy economy results in the inability of business to nance operations, further hindering national economic growth.

Extreme poverty makes Kenya a candidate for micronance small loans. The micronance industry started in Kenya about 20 years ago, but it only gained the status of an industry in the past ten years, where it is generally categorized along two lines (Hospes et al., 2002, pp. 23-5). First and most common is the formal versus informal. Formal providers are registered by Kenyan law. Informal providers are subject to self-regulation or group-based rules. Second, micronance in Kenya can be categorized as client- or member-based. In member-based organizations, members provide the resources as well as constituting the main target group for the loans. These are cooperatives. In client-based organizations, the customers are distinct from the owners. Customers are not involved with the management of the organization. Of this two-by-two matrix, our interest is with the formal-client-based quadrant, which contains most Kenyan MFIs. The attributes of formal- and client-based suggest to us that the respective MFIs would select rational and explicit PMs. When considering PMs, it must be remembered that MFIs tend to use groups to reduce information asymmetry. Nevertheless, with limited resources, Kenyan MFIs would want to ensure efcient and effective operations, and thus, we would expect carefully thought-out PMs. All borrowers of the selected MFIs become members of groups; the groups have two important responsibilities: (1) mutual support and advice to one another; and (2) guaranteeing that loans are repaid. Sometimes the borrower provides other collateral. Nevertheless, each member of the group guarantees the loans of other members. Group members often deposit savings with the MFI (or lender) as additional security. If a member defaults on a loan without sufcient collateral, the MFI will take the outstanding balances paid by group members including from their deposited funds. The fear of losing deposits to cover another group members loan creates cautious behavior among the group members in approving loans and in monitoring the businesses of one another. Groups are generally formed as part of community information sessions sponsored by the MFI. Prospective clients, particularly entrepreneurs showing interest, are invited to a series of follow-up meetings, and later invited to become a member in a self-organized group. Membership is heterogeneous regarding gender, afuence, and ethnicity. Members understand each others businesses, and they become close friends through weekly meetings. The duration of these meetings varies. New groups tend to take longer to conduct their transactions, whereas established and cohesive groups may take as little as 20 minutes. Payments from group members to the MFI are aggregated prior to the bi-weekly group meeting. The group mechanism reduces transactions costs for the MFI and its clients. Each MFI aggregates the loans into various portfolios for management purposes. Each portfolio is the responsibility of a credit manager, who monitors the performance of each loan. It is necessary for these MFIs to receive subsidies from various sources. Furthermore, consistent with the ndings of Ayayi and Sene (2010), the interest rates charged by MFIs in Kenya (averaging between 25 and 35 percent in 2008) exceed the rates charged by commercial banks (averaging between 13 and 18 percent in 2008). In summary, little documented evidence exists on how MFIs in Kenya measure performance. This study seeks to determine the PMs used by Kenyan MFIs. We are

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seeking to understand the PMs, rather than the PMSs. The latter would require an understanding of how the PMs are used as a system such as the BSC, which would take more involvement by the three Kenyan MFIs than their chief executive ofcers (CEOs) would allow. 4. Research method A case study is an empirical enquiry that investigates a contemporary phenomenon within its real life context, especially when the boundaries between the phenomena and context are not clearly evident (Yin, 2003). Case studies were important in this research in order to allow an in-depth understanding of how and why PMs were used in the subject organizations. A good case study should use as many sources of evidence as possible. In this research, three sources of evidence suggested by Yin (2003) were used. These were: (1) documentation; (2) interviews; and (3) archival records from the three MFIs. During the rst stage of data collection, the researchers reviewed publicly available information relating to the MFIs under study and the MFIs in general from public and some of their private records. The second stage required visiting the selected institutions, which involved detailed discussions with the chief nance ofcer (CFO) and the CEO at their head ofces. Each organizational interview took between two and three hours. A total of six interviews were carried out as shown in Table II. With the permission of those in charge of each MFI, the researchers reviewed the main reports prepared by the credit/nance departments. Arrangements were then made to visit the MFIs branches and customers so that the researchers could ascertain exactly how the MFI measured the performance of the loans and projects nanced, and therefore assess how PMs were used. As suggested by Lillis (1999), an interview guide was used to minimize interviewer bias (the Appendix). All participating MFIs required their information to be kept completely condential. Consequently, the actual names of the MFIs are disguised as ABC, DEF, and GHI. This study sought a sample of formal-client-based MFIs. At the end of 2006, there were 14 of them in Kenya. Most of these were registered as non-governmental organizations while others were registered as non-banking nancial organizations. Clients or customers were generally members of nancial self-help groups, which varied

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Firm ABC DEF GHI Table II. Interview schedule Total

Interviewee CEO CFO CEO CFO CEO CFO 6

Time taken (hours) 2.5 3 2 3 3 2.5 16

in size from ve to 50 members. These groups were registered with the Kenyan Ministry of Social Services. Group members tend to be trained by the MFI before obtaining an initial loan. A total of ve Kenyan client-based MFIs were selected for this study. All of these MFIs were the largest and most established, with both urban and rural branches. Data were collected between June 2007 and August 2008. Letters requesting the CEOs to participate in face-to-face interviews were sent to the ve MFIs in April of 2007. Two MFIs refused to participate in the study citing condentiality of the information sought and lack of time. Three MFIs agreed to participate and a copy of the interview guide (the Appendix) was sent to the respective CEO one month before the date of the interview. This allowed them time to prepare. Yin (2003) suggests four tests to establish the quality of a eld study: (1) construct validity, using the appropriate operational measures for the concepts being studied; (2) internal validity, demonstrating causal relations among conditions; (3) external validity, establishing the domain whereby the results can be generalized; and (4) reliability, showing that if the data collection were repeated, then the same results would occur. In this study, construct validity was addressed by investigating the same questions through multiple sources of evidence that included face-to-face interviews, archival sources, MFI web sites, nancial statements, etc. The data from different sources were compared, inconsistencies were resolved by contacting multiple sources, and draft ndings at each MFI were reviewed with the respective CEO and CFO. Internal validity was addressed through pattern matching, which concentrated on how and why the pattern of observation about each case was consistent or inconsistent with the expectations that the measures would be used to increase the repayment rates, decrease default rates, and contribute to nancial sustainability. External validity was addressed through replication logic. This analysis focused on cross case analysis and comparison of the results. Results from each case were considered to be ndings that were subject to replication by other individual cases. If the ndings obtained in subsequent cases were also consistent with the expectations, we concluded that the validity of the ndings had been strengthened. If the pattern obtained in the second case was similar to the pattern in the rst case, we interpreted this as a replication. We also tried to understand and explain any deviations of the patterns from the expectations. Finally, reliability was addressed through the use of face-to-face interviews, the use of a pre-established questions (the Appendix), and the use of extensive documentation. A qualitative analytical procedure was used to analyze and interpret the data. According to Lillis (1999), the analysis of any qualitative data involves the process of reduction, classication, and interpretation. Data collected were coded or matched and linked to the themes that were being investigated. Coding enhanced completeness of the data at the same time leaving out what may have been repeated or deemed unrelated to the matters being investigated. This method minimized potential bias and provided an audit trail, thus enabling the reader to track back to the source of the conclusions drawn.

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After the data were classied and summarized, sections of the transcript were selected to identify patterns among the constructs. Information was then derived so that conclusions could be drawn on how and why MFIs in Kenya used PMs for their own operations and their customers projects. 5. Case study ndings First MFI: ABC Registered as a limited company, ABC was established more than ten years ago as a non-bank nancial institution. At the time of this study, it operated more than 20 branches in Kenya, employed over 300 people, and had about 50,000 active borrowers. This MFI was also a deposit-taking organization with over 20,000 depositors. More than 70 percent of its clients were urban-based. Individual-based measures dominated the PMs. This was inconsistent to the ndings of Waweru et al. (2004), who reported that team-based PMs were the most widely used in developing countries. However, this MFI used both nancial as well as non-nancial measures to evaluate the performance of its managers and branches (divisions). Some of the notable individual measures included number of clients per ofcer, number of new clients per month, total loans disbursed per month, number of client meetings attended per month, and the ratio of loans at risk to total loans in the portfolio. Divisional PMs included quality of the portfolio, number of new clients, capacity (i.e. percentage of clients with loan facilities), total loans disbursed, prot margin, total interest revenue, and percentage of operating expenses to total loans. Organizational PMs at ABC were mainly nancial and were classied into three groups: (1) quality measures; (2) efciency and productivity measures; and (3) nancial measures. Quality measures included portfolio at risk/gross loan portfolio, loan loss provision expense/average gross loan portfolio, loan loss reserves/protability at risk, and write off/average gross portfolio. The efciency and productivity measures included operating expenses/average gross loan portfolio, cost per borrower, average outstanding loan size, number of borrowers per credit ofcer, and number of borrowers per staff. The nancial measures included cash ow, revenue growth, prot margin, return on assets, and return on equity. Three years earlier ABC introduced a BSC. According to the CFO, the aim was to communicate the organizations strategy to all employees and to link the PMs to the strategy. The staff bonus system, for example, was based on the BSC. The CFO mentioned that the company has an information system to monitor loan repayments, which was helpful in reporting weekly on overdue payments. The researchers asked the respondents to explain the purpose of ABCs PMs. Achievement of the organizations mission was cited as the most important factor followed by communication of goals to the employees. The respondents also perceived that competition in the sector had intensied during the last ve years, mainly from commercial banks making unsecured personal loans. Therefore, there was a need to remain competitive by comparing the MFIs results with others in the micronance sector.

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Other factors mentioned included motivating staff, training staff and providing information for control. In regard to performance measurements of nanced projects, ABCs respondents advised that their credit ofcers held bi-weekly meetings with their borrowing groups. Groups were able to make loan repayments during such meetings and deposits were also collected from individual clients. After such meetings, the credit ofcers were required to complete credit reports. The researchers viewed several reports to nd that they contained information such as number of customers in the group, total amount of the loans outstanding, amounts repaid, loans in portfolio at risk and loans overdue for more than 30 days. Ofcers of the MFI also paid monthly visits to clients whose loans exceeded Ksh. 100,000. Such clients were also required to submit quarterly cash ow statements. Some other notable PMs included the loan repayment rates, deposits per month and requests for more funds (usually after the repayment of the existing facilities). The ABC CFO said that divisional and organizational performance measurement assessment was a continuous process, but individual performance measurement was carried out at the end of the nancial year. Table III shows a summary of the MFIs PMs, re-arranged in the six dimensions suggested by Fitzgerald et al. (1991). Second MFI: DEF DEF has existed for more than ten years as a non-government organization. At the time of this study, it operated about 15 branches in Eastern and Central Kenya, directly employing over 100 people to serve more than 10,000 active borrowers. This MFI took deposits, and served both rural (60 percent) and urban (40 percent) clients. This MFI generally extended credit facilities to registered (organized) groups. DEF used both individual and team-based PMs. The CEO said, team-based measures are considered more important than individual measures. Some of the notable measures included number of new clients, number of loans approved,
Competitive position PMs Benchmarking Total loans disbursed Number of borrowers Number of savers Financial performance Operating expenses Average gross loan portfolio Cost per borrower Average outstanding loan size Number of borrowers per credit ofcer Number of borrowers per staff Resource exibility Operating expenses Average gross loan portfolio Cost per borrower Average outstanding loan size Number of borrowers per credit ofcer Number of borrowers per staff Resource utilization Capacity ratio Yield on portfolio Repayment rate

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Service quality Customer complaints Repeat borrowers Customer satisfaction rating Portfolio at risk/ gross loan portfolio Loan loss provision expense/ average gross loan portfolio Loan loss reserves/ protability at risk

Innovation Number of new products developed Number of new services developed Number of staff trained Number of new processes

Table III. PMs at ABC

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the amount of new loans granted, and the quality of the loan portfolio. The most common measures of divisional performance included prots (computed after the allocation of head ofce costs), revenue growth, quality of customer service, quality of portfolio, and ratio of operating expenses to revenue. DEFs organizational PMs were also classied as nancial, efciency, and productivity. The nancial measures included return on assets, return on equity, prot margin, and operating expenses ratio. The efciency and productivity measures included operating expense/loan portfolio (percent), cost per borrower, and borrowers per staff member. There were also risk measures, which included portfolio at risk (loans overdue for more than 30 days), loan loss reserve ratio, and loan write off ratio. This MFI did not have a BSC. However, the DEF respondents advised that the quality of customer service was measured annually with a survey. It had a staff incentive scheme that was based on the achievement of certain specied targets (both nancial and non-nancial). Commercial banks and the local cooperative societies were the major competitors. The DEF respondents perceived that competition had increased in recent years and changes were occurring quickly, hence the need to improve their quality of customer service was foremost. To this end, the CEO had introduced suggestion boxes, both at head ofce and at the branches where customers placed complaint letters, which were sent to head ofce every two weeks. The researchers asked the DEF respondents the purpose of their PMS. The main factor mentioned by the CFO was to align the goals of their employees with those of the organization. For example, the CEO commented, What gets measured gets done. The CFO advised that PMs were expected to motivate and train employees. DEF had an information processing system that helped in monitoring loans. However, loan reports were only produced once a month. To monitor the performance of nanced projects, DEFs ofcers visited client businesses and at times required them to furnish business records such as stock cards and prot reports (only for borrowings in excess of Ksh. 50,000). Loans were often released to clients in stages dependent on business inspections. Group members were also encouraged to provide DEF with information regarding their fellow members businesses. The respondents advised that this was possible since individual loans were usually guaranteed by all group members. This MFI also kept a record of the percentage of its clients whose income was below the poverty line (households earning less than US$1 per day). It was, therefore, able to monitor the impact of nancing on poverty alleviation. Organizational and divisional performance measurement was done throughout the year, but individual performance evaluation conducted only at the end of the nancial period. A summary of the measures used by DEF, re-arranged in the six dimensions suggested by Fitzgerald et al. (1991), is shown in Table IV. Third MFI: GHI At the time of this study, GHI operated over 20 branches in Kenya, with about 100 employees to service more than 5,000 active borrowers and 10,000 depositors. GHI was founded over ten years earlier as a registered non-government institution. It served both rural (70 percent) and urban (30 percent) areas. Although according to the CEO this MFI uses both individual as well as team measures, the emphasis was on team-based [PMs]. GHI was consistent with the

Competitive Financial position performance PMs Total loans disbursed Number of borrowers Number of savers Return on assets Return on equity Prot margin/ operating expenses ratio

Service quality Portfolio at risk greater than 30 days Loans loss reserve ratio Loans write off ratio

Resource exibility Operating expense/loan portfolio (%) Cost per borrower Number of borrowers per staff member

Resource utilization Yield on portfolio Repayment rate Recoveries on nonperforming debts

Innovation Number of new products developed Number of new services developed Number of staff trained Number of customers trained

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Table IV. PMs at DEF

ndings of Waweru et al. (2004) and Anderson and Lanen (1999) who reported that team-based PMs are expected in developing countries since the cultures tend to be collective and risk avoiding. Some of its most notable team/individual PMs included lead time (time taken to process a loan with a head ofce benchmark of four days), new clients per month, amount of loans disbursed per month, and number of group meetings held during the month. GHI branches were evaluated mainly on the basis of prot margin, number of new clients, revenue growth, proportion of loans at risk, quality of customer service, and operation self sufciency. GHIs organizational PMs also included nancial, efciency and productivity, risk and customer measures. The nancial measures included return on assets, return on equity, prot margin, operating expenses ratio, and gross loan portfolio to total assets. Efciency and productivity measures included operating expenses or loan portfolio, cost per borrower, borrowers per staff member, staff productivity, and loan ofcer productivity. The risk measures included loans overdue for more than 30 days ratio, loan loss reserve ratio, and repayment rate (a benchmark of 95 percent had been set). The customer measures included customer satisfaction, customer complaints, cost of customer to access products, and lead time (time taken to process loans; a four day benchmark). GHIs CFO said the above measures were arranged in form of a BSC and linked to the MFIs strategy. What was more interesting was that the MFI had identied several initiatives that had measures linked to the MFIs mission. With the help of a consultant, this MFI, according to the CEO, introduced an information processing system that was used to monitor loan repayments. The researchers asked GHIs CEO and CFO the purpose of the PMs. They answered, The achievement of the organizations mission was the most important factor. Other factors included communicating the organizations goals to employees, managing competition, motivating employees, decision-making information, and control of the MFIs costs. To evaluate the performance of customer projects, GHIs credit ofcers held bi-weekly meetings with the borrowing groups; they also visited these projects particularly where the amounts advanced were greater that Ksh. 50,000. The customers of large projects were also required to submit quarterly cash ow statements (both actual and projected). The GHI used variance analyses to assess whether the projects were

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proceeding as agreed. Groups were encouraged to monitor the projects of members and to report deviations from expectations to GHI credit ofcers. Borrower groups were expected to aggregate their loan repayments prior to the bi-weekly meeting and deposit such repayments during the bi-weekly meetings. The GHI respondents advised the researchers that divisional performance was monitored on a continuous basis in response to the changing nature of the operating environment. However, individual performance evaluations were monitored at the end of the nancial year. This coincided with a reward/compensation review period. See Table V for a summary of the PMs. 6. Discussion Using the ndings for Kenyan MFIs reported in the prior section, we now conduct a cross case analysis. This is to present how well the evidence matches the pattern suggested by the theoretical framework and the extent to which the ndings are replicated over the cases. The discussion is structured along the two research questions identied in Section 3. What PMs are being used by MFIs in Kenya? All three MFIs operated with formal PMs. Performance was evaluated at individual, division or branch, and organizational levels. Consistent with expectations (Brignall and Ballantine, 1995; Ittner and Larcker, 1998; Said et al., 2003), all three MFIs had introduced both nancial as well as non-nancial measures of performance. DEF and GHI emphasized team PMs whereas ABC emphasized individual PMs. Waweru et al. (2004), Anderson and Lanen (1999) and Chow et al. (1999) argue that team-based measures would be expected in developing countries where cultures are said to be more collective with high levels of risk avoidance. In all three MFIs, the number of new customers recruited, total number of loans disbursed, and the quality of loans in the portfolio were considered the most important measures of individual performance. This may be interpreted as though the MFIs recognized the need to increase their competitive position by increasing their relative market share, while also understanding the need to mitigate credit risk (Waweru et al., 2009). In GHI the number of days taken to approve a loan was considered an important factor in the evaluation of the individual performance, while in ABC the number
Competitive Financial position performance PMs Market share Number of borrowers Number of savers Return on assets Return on equity Prot margin/ operating expenses ratio Gross loan portfolio to total assets Service quality Customer satisfaction Customer complaints Cost of customer to access products Lead time (time to process loans) Resource exibility Operating expenses/loan portfolio Cost per borrower Number of borrowers per staff member Staff productivity Loan ofcer productivity Resource utilization Yield on portfolio Repayment rate Number of group meetings Compliance with internal audit reports

Innovation Number of new products developed Number of new services developed Number of staff trained Number of new processes

Table V. PMs at GHI

of group meetings was considered an important factor. The need to improve customer service to retain existing customers and attract new ones had therefore been recognized. This was prompted by the perceived increase in competition faced by the MFIs, particularly with the entry of the local banks into the micronance market. All three MFIs indicated that divisional performance was monitored on a continuous basis. Both nancial and non-nancial measures were used to evaluate performance at the branch level. Prot margin was considered the most important measure of divisional performance followed by quality of the loan portfolio. However, in DEF, prots were arrived at after the allocation of all head ofce costs, which is inconsistent with expectations (Baron and Greenberg, 2000). ABC and GHI introduced a BSC that linked the PMs to the MFIs mission and strategy. However, the BSC was only used at corporate level and had not cascaded down to the branches. It was therefore unlikely that the MFI was enjoying the full benets of the BSC. Furthermore, the ndings indicate that the participating organizations measured the success of their customers projects. This was consistent with the MFI mission of improving the welfare of their clients. Monthly visits to customer businesses were the most commonly used method. This was mainly used where customer borrowings were considered large (above Khs. 50,000). ABC and GHI required large customers to submit quarterly cash ow statements to the MFI. When such statements were received, actual cash ows were compared with projections and signicant variances queried. In ABC and GHI the credit ofcers held bi-weekly meetings with the customer groups where the progress of each nanced project was discussed and loan repayments collected from the groups. The ofcers later led their reports with the MFI. This project focus was also a means of reducing risk (Mikes, 2009, p. 21). As noted previously, loan repayments from group members were aggregated prior to the bi-weekly meetings and repayments made during the meetings. This reduced transaction costs and thus increased the chances of attaining nancial sustainability (Hamada, 2010). DEF and GHI encouraged group members to report on their fellow members, particularly when it was felt that the member projects had not progressed as expected. MFI staff would then follow up with the customer to authenticate the information and offer advice on remedial action. It was noted during the interviews that most of the customers were members of registered groups and that group members were required to guarantee borrowings of their members. It was therefore possible for the members to report on their peers. Other notable measures included loan repayments deposits made during the month and returning customers. How and why do MFIs in Kenya measure their performance? All participating MFIs advised that performance was evaluated at individual, divisional and organizational levels, which was consistent with the ndings of Neely et al. (2005). Whereas individual performance evaluation was mainly done at the end of the nancial year, mainly for the review of their compensation, both divisional and organizational performance was carried out continuously throughout the year. For example, in all three MFIs the management information systems enabled management to monitor the quality of the portfolio on a weekly basis. ABC and GHI noted that the constantly changing business environment required punctual reporting systems. Moreover, all participating MFIs reported that the main aim of their PMs was to assist with mission achievement. For example, GHI had (with the help of a consultant) introduced the BSC to link the measures to the mission. ABC and GHI used their PMs

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to manage competition. ABC and DEF used their PMs to motivate, train staff and to communicate goals to employees. DEF and GHI reported that PMs were also used to control costs. For example, a ratio of operating expenses to total loans had been introduced. Cost control was an important part of the management control system, particularly when MFIs are faced with perceived high levels of competition. Within the three MFIs, most services were standardized to reduce costs while the time spent with each client was limited. Consequently, measures tended to reect those of service shops, i.e. output measures that tend to measure results rather than processes. However, the subject MFIs were faced with intensive competition mainly from the commercial banks, hence the need to become more focused on clients. The measures reected the low level of contact time, lower levels of discretion and standardized services (mainly short-term loans, training, and business advice). The environments of ABC and GHI were well reected in the use of both internal and external measures. For example, by comparing the performance of the MFI with that of competitors (benchmarking) and the use of the relative market share metrics, ABC and GHI were able to understand both the external environment and their competitors. This was not said of DEF, which relied solely on internal measures. However, DEF also measured client satisfaction, which reected the competitive nature of the industry. All three MFIs were small and operated in an industry that did not require advanced information technology. They had in place management information systems that enabled them to monitor their loan portfolios and deposits on a weekly basis. Although this was considered adequate, the fast changing environment may have required more timely information and therefore a need to introduce more advanced systems. Our ndings indicated that measures had been developed across Fitzgerald et al.s (1991) six dimensions in all three MFIs visited. We also observed a balance between the nancial and the non-nancial measures of performance across the MFIs studied. For these MFIs, the subjects of the PMs had some say with respect to the setting of targets. For example, divisional managers performance was evaluated on the basis of new business, prots, and control of expenses. We, however, noted that in DEF divisional prots were computed after the allocation of head ofce costs, but divisional managers had little control over such costs (Baron and Greenberg, 2000). The policy at the three MFIs was to set targets that were not too high. We considered this good for motivation. In all three cases, PMs were well communicated to the employees and feedback was considered good and timely. In addition, for all three MFIs we observed that most of the objectives of the PMs had been achieved. Branch managers and employees appeared knowledgeable and content with the PMs, which was an indication of successful training and motivation. 7. Conclusion This paper studied the PMs in three selected MFIs in Kenya. It adopted a multiple case study approach based on a detailed open ended questionnaire. The study revealed a number of interesting ndings. The ndings have identied that the three MFIs in Kenya are using PMs that are considered best practices in term of the requirements for sustainability (Ayayi and Sene, 2010; Karlan, 2007; Wydick, 1999; Zeller, 1998). Since this is a relatively new sector, the ndings are important since the identied PMs may be adopted by other evolving MFIs. The commercial or bank-like nature of the MFIs suggests the

importance of performance measurement, such as loans overdue by more than 30 days. The management of each MFI is concerned with performance measurement as expected with a formal organization, i.e. a top-down demand for performance measurement. In addition, groups and group members at the bottom were interested in performance measurement as each had guaranteed the loans of all group members with the MFI. The customers appear to support performance measurement. The use of PMs by the Kenyan MFIs can be explained by the BSC framework (Kaplan and Norton, 1992, 1996). For example, we found that both nancial and non-nancial PMs were used for assisting managers to monitor the progress of employees, units, and organizations in achieving strategic goals. This study concludes that MFIs have relatively well developed PMs that support their particular businesses, hence an attempt to adopt best practices so as to achieve sustainability. There was a good balance between the use of nancial and non-nancial PMs. However, output measures were more commonly used than process measures. The nature of the MFIs especially the need for protability suggests the importance of performance measurement. Furthermore, we found briey that the subject rms used PMs for understanding their businesses and that the PMs were comprehensive and well thought out. Future research may be designed to compare the ndings in this study with ndings that relate to other MFIs, and to examine how PMs function individually and as PMSs in these MFIs. Most important in this future research will be to understand which PMs and which PMSs are the best practices in contributing most to sustainability. Such future research will show how PMS are developed from PMs. Furthermore, such future research may rely on a different framework, such as Simons (1995) levers of control, so as to understand how and why these organizations develop PMS. As for limitations, the study is constrained to Kenya and to the services shop sector of the service industry. MFIs in other developing countries may differ from their Kenyan counterparts. This may be due to the legal and regulatory constraints and economic policies or structures that differ among countries.
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Tharoor, S. (2011), Moneylending: the crisis of micronance, The Globe and Mail, 8 March, p. A21 (comment sec.). Waweru, N.M., Gelinas, P. and Uliana, E. (2009), Executive compensation schemes in the banking industry: a comparative study between a developed country and an emerging economy, Academy of Accounting, and Finance Studies Journal, Vol. 13 No. 1, pp. 13-28. Waweru, N.M., Hoque, Z. and Uliana, E. (2004), Management accounting change in South African: case studies from retail services, Accounting, Auditing & Accountability Journal, Vol. 17 No. 5, pp. 675-705. Wenner, M. (1995), A means to improve information transfer and loan repayment performance, Journal of Development Studies, Vol. 32, pp. 263-81. Wydick, B. (1999), Can social cohesion be harnessed to mitigate market failures? Evidence from group lending in Guatemala, The Economic Journal, Vol. 109, pp. 463-75. Yin, R. (2003), Case Study Research: Design and Methods, 3rd ed., Sage, Thousand Oaks, CA. Zeller, M. (1998), Determinants of repayment performance in credit groups: the role of program design, intragroup risk pooling, and social cohesion, Economic Development and Cultural Change, Vol. 46 No. 3, pp. 599-620. Appendix. Interview guide
1. Name of the institution 2. Your position in the institution 3. a) Number of years in business... b) What are your main sources of funds? Describe the relationship between your company and the fund providers. Do you provide any reports to the donors? If yes, please advise the type of information that you normally include in these reports 4. Please indicate the types of products and services offered to your clients: a).. b).. c)d) e) 5. Which segments of the society does you organization mainly serve: a) Urban small family business b) Urban marginalized people c) Rural stable operations d) Remote rural areas e) Other 6. How do you get your clients (most common)? Please rank in ascending order from most popular to least popular approaches. Advertise.. Referral.. Walk in Other Probe for details (continued)

7. Kindly indicate the factors that you consider when evaluating the success of your Divisions/Branches: 1) Financial.. 2) Non-Financial.. 3) Subjective 4) Other .. 8. Identify the factors that you consider while evaluating the success of your Managers/Officers. 1) Financial.. 2) Non-Financial 3) Subjective. 4) Other ..

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9. Please describe the performance measurement system currently in use in your organization. 10. Have you heard of the Balanced Scorecard? Has it been adopted in your organization? If yes, what measures are used? 11. a) What guidelines do you use to select your clients? b) Do you offer training to your customers? If yes, what types of training do you offer to your customers? How do you select the participants? 12. Do you evaluate the performance of your customers projects? If yes, what factors do you consider? 1) Financial. 2) Non-Financial.. 3) Subjective 4) Other . 13. Please describe your current performance measurement system. 14. Does your organization have an M & E framework for monitoring performance of the clients projects? 15. If yes, explain whether the indicators are adequate and how regularly monitoring is done. 16. Does your institution undertake post projects impact assessment? 17. Does your company visit the customers projects after the funds are disbursed? If yes, how often are the visits? What data is collected?

Corresponding author Nelson Waweru can be contacted at: waweru@yorku.ca

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